2012 - Embracing Microfinance - Proposed Collaboration Between Zakat Institution and Microfinance Institutions PDF

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EMBRACING MICROFINANCE: PROPOSED COLLABORATION BETWEEN ZAKAT

INSTITUTION AND MICROFINANCE INSTITUTIONS
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3rd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC
1783 RESEARCH ( 3rd ICBER 2012 ) PROCEEDING
12 - 13 MARCH 2012. GOLDEN FLOWER HOTEL, BANDUNG, INDONESIA
ISBN: 978-967-5705-05-2. WEBSITE: www.internationalconference.com.my
EMBRACING MICROFINANCE: PROPOSED COLLABORATION

BETWEEN ZAKAT INSTITUTION AND MICROFINANCE
INSTITUTIONS
Nurbani Md. Hassan1

nurbani.hassan@mmu.edu.my
Abd Halim Bin Mohd Nor2

drabdhalim@bdrmelaka.uitm.edu.my
Noor Ashikin Mohd Rom1

ashikin.rom@mmu.edu.my
ABSTRACT
The ultimate objective of zakat in Islam is to help the needy and the hard-core poor. To
accomplish this, the Zakat Institution has introduced various programs for the poor as to ensure
the poor will not be neglected and will not permanently living in the cycle of poverty. Due to
various responsibilities shouldered by Zakat Institution, the distribution has become less
effective and yet to reach its full potential. Collaboration with other institution is expected to
assist Zakat Institution in distributing the zakat fund to the rightful recipient in more efficient
manner. In the case of business and capital assistance program, past research has highlighted
the dimness of this program. Therefore, this paper attempts to explore the collaboration
process, especially the criteria(s) needed for effective collaboration and proposed the
collaboration model to be adopted by the Zakat Institution and Microfinance Institution in
delivering the effective microfinance program for the poor. Second, this paper would like to
propose more effective method in distributing the zakat fund for business by suggesting the
modus operandi of microfinance. Finally, this paper will provide recommendations on proper
instruments for Islamic microfinance as part of the Zakat Institution program.
Keywords : collaboration, zakat, microfinance, modus operandi, zakat distribution
1
PhD student at Universiti Teknologi Mara. Prior to joining the education field, the first author was attached with
banking and finance industry for more than 13 years. Her experience and expertise include evaluating SMEs
business proposal, recommending the suitable financial package, monitoring and collection.
2
Associate Professor at Universiti Teknologi Mara and also a Deputy Director of Zakat Research Institute, UiTM.
1.0 Introduction
The function of zakat is to assist the poor and the needy in fulfilling their basic needs. In
order for the zakat to be effective in helping the poor, it depends on the method of
distribution and also the purpose of it. The distribution of zakat which is based on the
monthly contribution of transfer payment did not solve the poverty issues in Islamic
society. Therefore new approach for zakat distribution that are capable of producing
more entrepreneurs among asnaf is needed to produce asnaf who can be independent and
able to support themselves (Abdul Rahman et al. 2011). As argued by Kahf (1981) zakat
is not limited to providing subsistence living for the poor but it rather aims at enriching
them. Based on this, Zakat Institution has developed programs which promote the
economic activities among the asnaf with the aim of taking them out from the poverty
cycle. However, due to various responsibilities that need to be carried out by Zakat
Institution, the effectiveness of the distribution of the zakat fund is still questionable.
Theoretically, by collaborating with other Institutions especially the Microfinance
Institutions could assist Zakat Institution in delivering more comprehensive mode of
financing to the eligible asnaf. The asnaf who is capable to work and have interest in
business will be identified and selected to participate in the program. As such, the capital
or business assistance for the productive asnaf will be provided in the form of
microfinance. This mode of financing is to finance the cost of starting up the business as
well as the working capital requirement.
This paper is organized into several parts. The first part consisted of the discussion on
the proposed collaboration between the Zakat Institution and Microfinance Institution by
discussing the criteria(s) for collaboration and proposed the collaboration model. Second
part suggested the modus operandi for microfinance and the final part discussed on the
suitable Islamic microfinance instruments, which can be used by Zakat Institution in
distributing the zakat fund.
2.0 Definition of zakat
Zakat is the obligation of the Muslim which constitutes as one of the five pillars in Islam,
apart from shahadah (declaration of faith), prayer, fasting and hajj (pilgrimage to
Mecca). Zakat originates from arabic word, Zakaa which literally means to grow, to
increase and to purify (Qardhawi, 2000). Muslims are required to share their wealth with
the poor by contributing a specific amount to the qualified recipients. According to the
Qurán, Chapter At-Taubah, Verse 60 the eight beneficiaries of zakat, are the poor, the
needy, the administrator of zakat (amil), the converts, the slaves, the debtors (those who
in debts to cover the basic needs), those who act in the cause of Allah(Fi sabilillah), and
the wayfarers (Ibnu Sabil). These beneficiaries are also known as asnaf. The objective
of zakat is to assist the eight beneficiaries in fulfilling their basic needs and also to
achieve socio-economic justice. Abd Wahab and Abd Rahman (2011) has discussed the
mechanism to achieve the socio-economic justice which include wealth creation
mechanism (Businesses, savings, employments, others), wealth distribution mechanisms
(payment of zakah, sadaqah, waqf) and Recipients (the eight beneficiaries of zakat).
3.0 The Administration of zakat in Malaysia
In Malaysia, the responsibility in managing the zakat fund is under the responsibilities of
each state-owned organization. The state-owned organization is Majlis Agama Islam
Negeri (MAIN), hereinafter will be referred as Zakat Institution (“ZI”). Basically, MAIN
is responsible in all aspect of the management of zakat, which include collecting and
distributing the zakat fund to rightful recipient. Though the zakat management varies
from one state to another but all carry the same aim of zakat (Abd Wahab and Abd
Rahman ,2011) The responsibilities of collecting and distributing of zakat fund which
has been shouldered by the ZI has faced with various challenges. Therefore next section
will highlight the challenges faced by ZI in collecting and distributing of zakat fund.
4.0. Challenges in collecting and distributing of zakat
Previous studies has highlighted on various problems and challenges faced by the ZI in
collecting and distributing of zakat. IkaZ (2010) as cited by Mohd Noor et al.,(2011)
confided that payments and distributions of zakat has yet to reach its full potential.
Wahid et al.,(2009) highlighted that the main reason for the dissatisfaction of the zakat
payers are due to ineffective distribution methods and insufficient dissemination of
information on zakat distribution. Ahmed at al., (2006) revealed that about 57 of the
respondent were dissatisfied with the current distribution of zakat. Mahamod (2011) in
his research found out that one of the phenomenon that hindering the effective use of
zakat in state of Kedah revealed that there is a priority put in place for the distribution of
zakat in the form of economic assistance. Mohd Noor et al,. (2011) in his study
pertaining to zakat collection and distribution gap highlighted the issues faced by ZI in
collecting and distributing of zakat which can be summarized as follows:-
a) Undistributed of zakat was due to the practices of paying the zakat which is normally
end of the year;
b) Zakat Managers is too conservative on the expected collection of zakat and thus tend
to prepare distribution budget which is much lower than collection.
c) Inability of some sections or departments within zakat organizations to fully utilized
the allocated fund.
d) Problem of understaffing. Inadequate staffing lead to work backlogs and ultimately
influence the quantity and quality of zakat distributed.
e) Lack of zakat fund distributed, than what is available, gives impact on the on the
effectiveness of program undertaken by Zakat Institutions.
The challenges highlighted depicts that the problems will persist if the distribution
method of zakat is not improved. As confided by Abd Wahab and Abd Rahman (2011),
an effective zakat distribution should result in better quality of life including food,
education, health and shelter for the beneficiaries. Therefore ZI needs to have an
effective zakat distribution method in place so that the socio-economic status of the
recipients could be improved. However, effective zakat distribution could not be
achieved if the ZI has to do all the distribution tasks, which might resulted in a loss of
focus in certain area. Therefore co-operation and collaboration with another party could
assist ZI in achieving its objectives. For example, the ZI has entrusted the third party,
which is the education foundations to distribute the zakat in the form of education
assistance so that the ZI could concentrates on other matters. Likewise for effective
business and capital assistance distribution, ZI should collaborate with another institution
which has the similar objectives and goals, similar target group and similar culture so that
the aim of zakat could be achieved. As such, in delivering proper mechanism for
business and capital assistance, ZI should collaborate with institutions that have the
experience and expertise in handling the micro loans for micro entrepreneurs such as
Microfinance Institution (“MFI”).
5.0 Proposed Collaboration between Zakat Institution (“ZI) and Microfinance

Institution(“MFI”)
The proposed collaboration between ZI and MFI is to enhance the existing distribution of
zakat fund as currently ZI has to shoulder various responsibilities and thus increase the
dissatisfaction of the zakat payer towards the effectiveness of ZI (Mohd Noor,
2011;Wahid, 2009; Ahmed, 2006). This section focused on the effective distribution for
business and capital assistance via collaboration with MFI.
5.1 Definition of Collaboration
Collaboration is known by many names described as “working together”, “a joint

venture”, “working jointly with others’’, ‘’joining forces’’, “working in
partnership’’, ‘’pooling resources’’, ‘’acting as a team’’, ‘’cooperating with one
another’’ (Gajda, 2004). So, in another word, collaboration is about relationship
between two entities. Gray (1990) define collaboration as a process through which
parties who see different aspects of a problem can constructively explore their
differences and search for solutions that go beyond their own limited versions of
what is possible. Guo and Acar (2005) in their studies on non-profit organization
collaboration defined non-profit collaboration as what occurs when different non-
profit organizations work together to address problems through joint effort,
resources, and decision making and share ownership of the final product or
service.
5.2 Collaboration in non-profit organization.
Collaboration is not a fixed form and may take various forms. Previous research
has been conducted on exploring the reasons on why non-profit organization
collaborates. Sowa (2009) explores the motivation to collaborate in 20
interagency collaborations operating in early care and education and found out
that motivations attached to service needs of the lead organizations and
motivations attached to organizational needs. Foster & Meinhard (2002) in their
study on non-profit organizations in Canada found out that organizational factors
such as size and type were found to be related to the extent of formal collaborative
activity. In addition to this, the findings also suggest that large organizations
would be more likely to collaborate because they have more resources. Gajda
(2008) in her studies revealed the five principles of collaboration theory, which
are as follows:-
5.2.1. Collaboration is an imperative
5.2.2. Collaboration is known by many names
5.2.3. Collaboration is a journey and not a destination
5.2.4. With collaboration, the personal is as important as the procedural
5.2.5. Collaboration develops in stages.

Osborne and Murray (2000) argues that collaboration process are developed in
five stages such as pre-contact phase; the preliminary contact phase; negotiating
phase; implementation phase; and evaluation phase. In the multi-phase process,
Murray has further isolated four sets of factors which affect the probability of
negotiation for successful collaboration which includes the type of collaboration
sought, the characteristics of organizations entering into the collaboration, the
process of developing and implementing the collaborative process and the
environmental and contextual factors which impinge on the collaboration. There
are few MFIs in Malaysia which is a non-profit institutions such as Amanah
Ikhtiar Malaysia (“AIM), Yayasan Tekun Nasional (“TEKUN”), Yayasan Usaha
Maju (“YUM”) in Sabah, Koperasi Kredit Rakyat (“KRY”) in Selangor. These
MFI provides microfinance facility to the poor and low income people. ZI has the
responsibilities in distributing the zakat fund to the poor people and by entering
into the collaboration with other non-profit organization could help ZI in
distributing the zakat fund in more efficient manner as part of the ZI’s
responsibilities has been outsource to the third party. However, as to make sure
that the collaboration will not lost its focus on the aim to eradicate poverty, ZI
should monitor its collaboration partner closely.
5.3 Criteria for Effective Collaboration
Hudson Valley Business Journal (March 28,2011) discussed the criteria for
effective collaboration which include leadership, communication, common
mission and clear cut goals and objectives. These criteria can be illustrated via a
diagram as follows :-
Figure 1 : Criteria for Effective Collaboration
Leadership
Need
Effective Service same

Collaboration need or
community
Compatible
culture
Goals
Source : Hudson Valley Business Journal, 28 March, 2011
Based on the above diagram in Figure 1, the proposed collaboration between ZI and MFI
must be examined whether both institutions have the criteria as mentioned prior to
entering the collaboration process :-
5.3.1. Leadership
Collaboration can only be effective if the top management of both institutions
agree and commit to the collaboration process. The board of directors of both
institutions need to discuss on the reasons to collaborate, benefits, advantages
before decision to collaborate can be made. If the top management of both
institutions cannot agree with each other, then collaboration process might be fail.
5.3.2. Need
In other to collaborate, both Institutions must look at the needs of each of the
Institution. The ZI needs to collaborate as it will close the gaps that exist in the
institution such as understaffing, lack of professional skills and experience in
executing the business and capital assistance program. On the other hand the MFI
might see the needs to collaborate as to expand their coverage in providing the
financial services to the poor and the needy.
5.3.3. Similarity and serving the same need or community

In order to have effective collaboration, ZI must find other organizations or
institution that offers the same services so that resources can be pool together and
it can also avoid duplication of services. ZI and MFI is serving the same group of
people, which is the poor and the needy and this gives an opportunity for ZI and
MFI to pool all the resources available. In addition, it could also hell in reducing
the duplication of service as collaboration has identified each institution roles and
responsibilities.
5.3.4. Compatible culture

In this context, to have effective collaboration, both institutions need to have the a
culture that is compatible to each other. If both institutions’ culture are so vastly
different, than collaboration would become impossible. ZI and MFI has the same
culture such as both are situated in the same country, practising the same
language, has the same work pattern and thus both are the perfect match for
collaboration.
5.3.5. Clear cut goal and objectives.

Both ZI and MFI need to have clear cut goals and objectives so that both
institutions knows their roles and responsibilities and this makes the collaboration
easier and the outcome could be achieved. Both ZI and MFI share the common
mission which is to eradicate poverty among the poor and with collaboration, both
institutions can achieve their mission effectively.
In addition to the both criteria, the element of trust should also be considered towards the
effective collaboration, as trust is not something that can be developed overnight. Ring
and Van de Ven (1992) as cited by Osborne and Murray (2000), noted that trust required
for such collaboration (collaboration at more significant service level, involving joint
planning and provision of services) is not given but has to be built up over a period.
If both ZI and MFI fit with the collaboration criteria, the collaboration plan could be
executed between both parties. In Malaysia, Amanah Ikhtiar Malaysia (‘’AIM’’) is one
of the most successful microfinance institution and has been entrusted by the government
to serve the needs of the poor by providing a collateral free loan with very minimal
service charge. Based on the statistic provided by AIM, in year 2010, there are 17,500 of
hard core poor people and 303,000 poor people. The AIM members as at 2010 are
253,631 members, which indicate that AIM has served 84% of poor households in
Malaysia (Kadri 2010). As such, AIM is the suitable to become the collaboration partner
with ZI. The collaboration between ZI and AIM is suggested due to the following
reasons :-
a) AIM is the oldest microfinance Institution in Malaysia and one of the most
successful microfinance institution in Malaysia.
b) Zakat Institution and AIM shares common mission which is to eradicate poverty and
both institution has a clear cut objectives and goal which is to serve the needs of the
poor.
c) Both AIM and Zakat Institution serves the same target group of people which is the
poor and the hardcore poor.
c) AIM has sufficient skills, experience and expertise in the microfinance program,
which the Zakat Institutions don’t have.
d) AIM has been providing the financial services to nearly 84% of poor household in
Malaysia as at end of year 2010.
e) Both Zakat Institution and AIM are non-profit organization which makes both
institutions compatible with each other.
The collaboration between ZI and AIM is expected to improve the zakat distribution in
the form of business and capital assistance and this can be done via microfinance
program. AIM has proved that via its microfinance program, the institution has served
the financial needs of approximately 84% of the poor and hardcore poor population. As
such, the collaboration would assist ZI in providing the capital for the poor to start their
business. This is important as businesses would help the poor to develop themselves and
subsequently brings them out of poverty cycle. As argued by Kahf (1981), zakat is not
limited to providing the subsistence living for the poor but it rather aims at enriching
them.
5.4 Collaboration Model
This paper has discussed on the criteria needed for the effective collaboration and
also has suggested the suitable partner for the collaboration effort, which is AIM.
The next step is to construct the collaboration model to be adopted by ZI and
AIM. Figure 2 below shows the proposed collaboration model which is as
follows :-
Figure 2: Proposed Collaboration model
Zakat Institution
(Fund Manager)
collaboration Microfinance Outcome

program
Amanah Ikhtiar
Malaysia
(Operation
Manager)
Source : Author’s Own
The proposed collaboration model shows that ZI and AIM collaborates to execute
the microfinance program. In the collaboration model, ZI will be the Fund
Manager who is responsible in collecting and distributing of the fund, whereas,
AIM will be the Operation Manager who is responsible of handling the operations
matter of microfinance such as processing application, recommending the suitable
financial package, field visit, monitoring, rehabilitation and collection. The
outcome from the collaboration model can be measured in terms of the size of the
fund disbursed, the amount of funds collected, the number of successful recipients
and also the coverage of the microfinance program.
6.0 Embracing Microfinance in Zakat Institution
The collaboration between ZI and MFI has been discussed in detail and this section focus
on microfinance as part of the ZI program in developing a successful entrepreneur among
the poor. This section will also discuss the modus operandi for the ZI in embracing
microfinance program as well as highlighting the suitable instruments for microfinance,
as to promotes effective
6.1 Definition of Microfinance
Microfinance is a provision of broad range of financial services such as savings,

credit, insurance and payment services to the poor or low-income group who are
excluded from the normal banking service (Ledgerwood, 1999). Khan (2008) as
cited by Akhter (2009) define microfinance as making small loans to the poor
people (especially those traditionally excluded from financial service) through
programmes designed specifically to meet their particular needs and

circumstances. The word micro is equivalent to small and generally, microfinance
means providing financial services to the poor people in small amount.
6.2. Microfinance and zakat
Microfinance has been much discussed by the scholars as it has been successful in
assisting the poor and needy in enhancing their economic status. Ahmed (2004)
as cited by Ibrahim & Ghazali (2011) has found out that the impact of the
microfinance program using the Qardul Hassan scheme has helped the farmers
and small business. Mosley and Hume (1998) has conducted a study on 13
microfinance institutions and found out that the income and assets of the borrower
has increased due to microfinance.
The above shows that microfinance has proven to improve the socio economic
status of the poor, though it does not eradicate the poverty in total. Based on the
successful of the microfinance programs in helping the poor in generating the
income, ZI should emulate the program as ZI also serves the same target group,
which are the poor and the needy. However, questions might arise on whether
zakat fund can be utilised to provide an interest free loan? Can Zakat Institution
expect a return from the zakat fund that has been invested to finance the working
capital requirement of the poor? Sarif and Kamri (2009) has discussed on
utilizing the zakat as loan which has a great potential to help more recipients
without the problems of the fund being exhausted. The author further confided
that any obligation to return the proceeds is not only a new invention in fiqh ,
which has no support in the al-quran and sunnah, but also infringes the tamlik
principle. The discussion on the shariah ruling pertaining to the use of zakat was
held in Egypt in 1950 in answering the question by the government of Pakistan
about this issue. Abu Zahrah (1951) in answering the question has allowed the
zakat funds may be utilized as a loan. Other jurist such as Al-Qardawi and Al-
Mawdudi is of the opinion that zakat can be utilized as a loan which is in line with
the objective of zakat and also based on principle of istihsan.
The ZI could adopt the microfinance which is shariah compliance as one of the
program to assist the poor in becoming an entrepreneur and managed to generate
their own income. Author’s interview with Officer from Baitulmal of Melaka
revealed that the business assistance via microfinance scheme has been
implemented in 2008 by adopting the concept from AIM, but the program has
failed due to lack of skills of the amil, no proper monitoring and mechanism. As
a result from year 2008 till 2011, only RM1.08 million was distributed to the
asnaf in the form of business assistance and only RM400,000 was collected as
repayment towards the micro loans granted to asnaf.
There are few researches conducted which relates the microfinance and zakat such
as Hassan (2010) has developed an integrated model combining zakat, awqaf and
microfinance. Sarif and Kamri (2009) discussed the contemporary solutions on
zakat for income generating programs by utilizing zakat as loan. Ibrahim and
Ghazali (2011) analyze the role of zakah as Islamic microfinance from various
aspects. Atia (2010) has discussed on providing beneficial/benevolent
loan/interest free loan for the income generating project. Abdul Rahman et al.
(2011) have discussed the conceptual framework on channeling the zakat
collection to the poor through microfinance. Md Saad and Duasa (2011) has
conducted an exploratory study on zakat as a source of fund for Islamic
Microfinance.
All this while, the distribution of the zakat for business assistance does not require
repayments. Without pressure to repay, it may encourage misuse or poor use of
funds (Sarif & Kamri, 2009). This finding is supported by Hurley, D (1990) which
viewed credit as requiring repayment and forcing the participants to take
responsibility for the funds. It might also contributed by the attitude of the asnaf,
where Md Ramli et al. (2011) found out that it was the attitude which drive the
asnaf to succeed in the business. In addition to this problem, Abd Rahman and
Ahmad (2010) and Thuaibah et al. (2004) in their research mentioned that the
success and failure in business depends on both outside and inside factors, of
which outside factor is the capital and inside factors are interest, expertise,
experience and attitude. Therefore, an appropriate form of financing such as
microfinance should be developed by ZI as this mode of financing has proven to
be successful in alleviate the poverty among the poor. In addition, the poor who
become an entrepreneur could contribute to the economy as micro-businesses are
the dominant form organization and have an important role in maintaining a stable
and sustainable global environment (Samujh, 2008).
6.3 Modus Operandi of Microfinance
The microfinance program should be designed in such a way that it will serve the
needs of the poor and subsequently aiming at the sustainability of the program. In
order to embrace microfinance, modus operandi should be developed to be
adopted by Zakat Institution. This modus operandi is developed based on the
author’s 13 years experiences in credit processing and financing for Small
Medium Enterprise (SME) , supported with the past researches. Below are the
recommended modus operandi for microfinance in zakat :-
6.3.1 Selection/screening Process

The selection and screening process should be done via interview
between the amil and the asnaf. The amil should collect as much
information as possible such as the background of the asnaf, level of
education, business idea and attitude. The process of selection and
screening should be made simple as to reduce bureaucracy problems.
Study by Wahid et al. (2011) has detected a bureaucracy problem in the
zakat application procedure.
Abdullah (2010) in her study about zakat management in Brunei has

highlighted the following criteria during the selection process which are
as follows:-
a) Fitness
b) Has interest in specific area of activity and skill
c) Has high desire to uplift standard of living
d) Desires to be independent
e) Hard working and persistent attitude
f) Willing to learn and attending suitable training when required
6.3.2. Appraise and Package of facility

After the selection and screening process, the amil should evaluate the
business idea in terms of the feasibility and the viability of the business.
Business idea in this context is in terms of verbal business idea as
normally the asnaf is has no formal education and unable to prepare a
business proposal. If the asnaf does not have any business idea but the
amil could foresees that asnaf is capable of doing the business, the amil
can suggest or recommend the suitable business based on the asnaf
capacity and interest towards the business. At this stage, the amil should
have established the amount needed for the business by calculating the
working capital requirement to finance the working capital of the
business and also to establish the amount needed for the purchase of
equipment or machine. In addition, a feasibility study which includes

cashflow must also be conducted to know the sufficient amount of capital
needed for the business (Abdullah, 2011). Finally, the appropriate
financial package should be proposed which suit with the nature of the
business. In this process, the appropriate instruments of financing should
be applied based on Islamic finance principle. The amount of financing
should depend on the business needs and Zakat Institution should have
the limit range. For example, the financing limit for a trading business
can be in the range of minimum RM500 (USD 161) to maximum of
RM5,000 (USD 1,613).
6.3.3. Forming a group

The next process is to form group members between the asnaf who has
passed the selection and screening process. The group should consist of
3-5 members and according to Habib Ahmad (2009), forming groups is
part of the microfinance program as they serve as a social collateral and
ensure the repayments of funds. He further confided that from the
microfinance perspective, a group is considered to be carrying out it’s
functions when members of a group help or pressurize other fellow
members in case of nonpayment of installment(s). Nawai (2011) in her
study has outlined the conditions of forming a group adopted from AIM
which include the same gender, no blood relation, responsible,
trustworthy and agree to be a group member. Selecting the group
members should be done by the amil as the amil is the person who
carried out the selection and screening processes and thus have sufficient
information of the asnaf.
6.3.4. Training
The asnaf is required to attend a training organized by Zakat Institution.
At this level, the Zakat Institution can observe the attitude of the asnaf
by looking at their commitment in attending the training. The training is
important for the asnaf in building the technical knowledge on how to
handle business, how to record the sales proceeds and expenditure, how
to market the product. The asnaf who is not determine enough to be
entrepreneur, they will not succeed (Shahir & Adibah, 2010). The
training should be on going as to make sure the asnaf are always
equipped with the knowledge in business. Islam (2009) in his research
found out that one of the common factors that inhibited entrepreneurs to
start and run their own business is lack of training and business skills.
6.3.5. Disbursement Process
The disbursement of zakat must be accordance to the needs of the

business. Before proceed with the disbursement of the zakat fund, the
basic needs of the asnaf should be met as failure to meet with the asnaf’s
basic need will end up in the misuse of zakat fund for personal
consumption. Obaidullah & Khan (2008) in outlining the fundamental
conditions of successful microfinance program has included a condition
of meeting the basic needs on a priority basis. In addition, meeting one
basic needs is in accordance with Maslow Theory (1954), where one’s
basic needs must be first fulfilled before proceeding to the next needs.
Therefore, meeting the basic needs is important to avoid the misuse of
business for personal consumption. The method of zakat disbursement
for business will depends on the type of finance offered. If the loan is to
finance the purchase of machine and equipment, the loan should be
disbursed directly to the supplier, as to reduce the risk of diversion of
fund. The repayment period should be structured in such a way that it
will not burden the asnaf and also based on the nature of the business
invested by asnaf.
6.3.6 Monitoring and Feed-back
Monitoring is important to ensure that the loan is being utilized for the
business purposes only. The Zakat Institution should monitor the
progress of the business and filed visit should be conducted at least twice
for every 6 months. The first visit should be conducted one month after
the disbursement of the business and the second visit in the 5th month of
operating the business. Feedbacks should be obtained from the asnaf so
that proper assistance could be extended should problems arise. Saleh
(2002) stressed that monitoring is a must as to ensure that the poor and
the needy optimized the tools provided in order to move out of poverty.
Author’s interview with Baitulmal of Melaka revealed that the
microfinance program implemented failed simply because the asnaf are
not monitored accordingly and are left to do business without any
guidance.
6.3.6. Rehabilitation and Restructuring
Should the business fail due to death, chronic illness, accidents, fire,
natural disaster, marital problems, or any problems which is unexpected
or unavoidable, which has resulted a total loss of the business, further
assessment should be made. If the business cannot be revived and it is a
total loss, the business loan should be write-off and this will not affect the
ZI as it is a non-profit organization. However, if the business fail
because of poor marketing strategy, poor distribution, lack of expertise
and skills and other problems which is not relates to the earlier reasons,
the ZI can make an effort to rehab and restructure the business such as
defer the payments for certain period or restructuring the repayment
schedule and at the same time conduct an analysis on the business failure
or slowdown and suggest corrective actions.
6.3.7 Evaluation on the performance of the business
The last process would be the evaluation of the business to measure the
performance of the business. Quarterly review or assessment should be
made on the performance of the business and if the business found to be
progressing well and profitable and the repayment of the loan has been
prompt and consistent, this indicates that the asnaf who run the business
has been capable of generating its own income and the asnaf should be
able to become zakat payer. Should the asnaf requires more loans to
expand the business, Zakat Institution may refer the asnaf to microfinance
institution such as AIM where the asnaf can apply the loan directly to AIM
in bigger amount.
The above modus operandi could be summarized in the diagram below as

illustrated in Figure 3
Figure 3 : Proposed Microfinance Modus Operandi for Zakat Institution
Selection & Appraising & Forming Training

Screening Packaging group
Successful Performance Monitoring Disbursement

Businesses Evaluation & Feedback
Source : Author’s Own
The above proposed modus operandi for Zakat Institution is expected to

smooth the operations of Zakat Institution in distributing the zakat fund
in the form of business loan. The proposed modus operandi is to be
embraced together with the Islamic Microfinance instrument which is
according to shariah principle.
There are quite a number of instruments available in Islamic financing and in this
section, only appropriate instruments will be suggested to be implemented by
Zakat Institution, to be adopted in microfinance. Abdul Rahim (2010) in his
paper revealed that Islamic finance offers various ethical schemes and instruments
that can be advanced and adapted for the purpose of microfinance. The author
further added that comparatively, qardhul hassan, murabahah, and Ijarah
schemes are relatively easy to manage and will ensure the capital needs (qardhul
hassan), equipments (murabahah) and leased equipments (ijarah) for potential
micro-entrepreneurs.
Below is the recommended Islamic Financing instruments which can be adopted

in the Microfinance Program :-
Instruments Purpose Repayment

Qardhul Hassan To finance the working Minimum of 12 months period
(Benevolent loan) capital requirement of and up to the maximum of 36
the business such as months depending on the size of
purchase of materials the loan. Repayable by monthly
and payment of installments.
operating expenses such
as rental, utility, salary,
etc.
Ijarah (leasing) To finance the lease of Minimum of 12 months period
the asset such as and up to maximum of 36
machines/equipments. months depending on the size of
the loan. Repayable by monthly
installments in the form of rental
The above instruments were proposed to be implemented as the other Islamic

finance instruments such as Murabaha, Musharaka, Mudarabah, Bay’-mu’ ajjal
is more on profit-loss sharing basis which is not in line with the economic
objective of zakat which is to reduce poverty and income inequality among the
society.
7.0. Conclusion
Theoretically, the collaboration between ZI and AIM is expected improve the distribution
of zakat fund in the form of microfinance. The collaboration reduce the gaps exist in ZI
institution such as understaffing, lack of business skills and expertise. Therefore
collaboration with AIM will help to solve the problems or gaps exist in ZI. The
collaboration sought is in terms of sharing the expertise from AIM and sharing the
resources available as to make sure the collaboration will be successful. In the
collaboration process, the role of ZI in collecting and distributing of fund will not change.
The ZI is acting as a Fund Manager who is responsible in managing the fund and AIM
will be the Operations Manager who is responsible in the operations matter of
microfinance. The segregation of duties will lead to more focused and concentrated task,
thus will lead to the efficiency of the task. However, before embarking on the
collaboration process certain criteria need to be met as listed in Figure 1 as to ensure
effective collaboration. The collaboration model for the microfinance was proposed with
the intention to improve the current method of zakat distribution as the existing business
and capital assistance program is not really successful. For example, in the case of
Lembaga Zakat Selangor, the successful rate of the asnaf who become the entrepreneurs
are only 30% (Ibrahim, 2009).
This paper has also suggested the modus operandi of microfinance program as a proper
method in distributing the fund to the productive asnaf. The proper modus operandi is
expected to serve as a reference or guideline for ZI in implementing the microfinance
program. The modus operandi for microfinance commenced with the selection and
screening process and end with the evaluation of the performance of the business. The
modus operandi will be a challenge for ZI to implement, as most of the staff are lack of
professional skills and experience. Therefore collaboration will bridge this gap and
mutual collaboration will assist ZI in executing the microfinance program.
The microfinance program should use the Islamic microfinance instruments such as as
Qardul Hassan which is the benevolent loan or interest free loan. This mode of financing
is suitable to finance the business start-up as well as working capital requirement. Other
mode of financing which can be used is Ijarah or leasing, which is suitable to finance the
purchase of equipment or assets for business use. In Ijarah, the ownership of the assets
financed will be with the financier, in this case, ZI and at the end of the tenure, the
transfer of ownership can be done.
Overall, the zakat distribution currently is in the process of transformation, from monthly
contribution to productive zakat distribution with the aim to transform the asnaf from
zakat receiver to zakat payer. In order to materialize the aim, ZI must be ready to face the
changes starting from the top management right down to the lower management.
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EMBRACING MICROFINANCE: PROPOSED COLLABORATION BETWEEN ZAKAT

abd halim mohd noor

ARI research grant View project

The user has requested enhancement of the downloaded file.

EMBRACING MICROFINANCE: PROPOSED COLLABORATION

Nurbani Md. Hassan1

Abd Halim Bin Mohd Nor2

Noor Ashikin Mohd Rom1

Keywords : collaboration, zakat, microfinance, modus operandi, zakat distribution

2.0 Definition of zakat

3.0 The Administration of zakat in Malaysia

4.0. Challenges in collecting and distributing of zakat

5.0 Proposed Collaboration between Zakat Institution (“ZI) and Microfinance

5.1 Definition of Collaboration

Collaboration is known by many names described as “working together”, “a joint

5.2 Collaboration in non-profit organization.

5.2.1. Collaboration is an imperative

5.2.2. Collaboration is known by many names

5.2.3. Collaboration is a journey and not a destination

5.2.4. With collaboration, the personal is as important as the procedural

5.2.5. Collaboration develops in stages.

5.3 Criteria for Effective Collaboration

Figure 1 : Criteria for Effective Collaboration

Effective Service same

Source : Hudson Valley Business Journal, 28 March, 2011

5.3.3. Similarity and serving the same need or community

5.3.4. Compatible culture

5.3.5. Clear cut goal and objectives.

5.4 Collaboration Model

Figure 2: Proposed Collaboration model

collaboration Microfinance Outcome

Source : Author’s Own

6.0 Embracing Microfinance in Zakat Institution

6.1 Definition of Microfinance

Microfinance is a provision of broad range of financial services such as savings,

programmes designed specifically to meet their particular needs and

6.2. Microfinance and zakat

6.3 Modus Operandi of Microfinance

6.3.1 Selection/screening Process

Abdullah (2010) in her study about zakat management in Brunei has

b) Has interest in specific area of activity and skill

c) Has high desire to uplift standard of living

e) Hard working and persistent attitude

f) Willing to learn and attending suitable training when required

6.3.2. Appraise and Package of facility

equipment or machine. In addition, a feasibility study which includes

6.3.3. Forming a group

6.3.5. Disbursement Process

The disbursement of zakat must be accordance to the needs of the

6.3.6 Monitoring and Feed-back

6.3.6. Rehabilitation and Restructuring

6.3.7 Evaluation on the performance of the business

The above modus operandi could be summarized in the diagram below as

Figure 3 : Proposed Microfinance Modus Operandi for Zakat Institution

Selection & Appraising & Forming Training

Successful Performance Monitoring Disbursement

Source : Author’s Own

The above proposed modus operandi for Zakat Institution is expected to

Below is the recommended Islamic Financing instruments which can be adopted

Instruments Purpose Repayment

The above instruments were proposed to be implemented as the other Islamic

Abdul Rahman AR., (2010). Islamic Microfinance : An Ethical Alternative to Poverty